Amid this uncertain market environment, it's not often you hear about stocks with the potential to muscle higher. Therefore, playing with one of the awesome filters on SchaeffersResearch.com, I decided to check out some uptrending stocks with heavy short interest – a bullish implication from a contrarian standpoint. Delving through the results, I came across an equity that caught my eye: O'Reilly Automotive, Inc. (ORLY: sentiment, chart, options), which specializes in the retail of automotive parts, tools, supplies, equipment, and accessories in the United States.
To see how I utilized the filter, check out a previous edition of Short Interest Report.
Revving higher on the charts...
Before we dissect the short-selling data, let's begin by analyzing the stock from a technical perspective.
Since rebounding off support in the 22 region – which was home to the stock's 100-month moving average, and a former area of resistance – in mid-2008, the shares of ORLY have surged about 45%. In fact, the auto issue has outdistanced the S&P 500 Index (SPX) by an impressive 47% during the past 60 trading sessions, underscoring its status as a broad-market standout. The security is now attempting to establish a foothold in the 31 neighborhood, which is home to its 40-month trendline, and played the part of support during most of 2006 through 2007.
Word on the Street
However, despite the stock defying broad-market trends, short sellers continue to add to their bearish bets. Since October 2008, short interest on ORLY has skyrocketed in parity with the stock's rally, advancing 34% during just the past month. These pessimistic positions now account for 14.11 million ORLY shares, or 11% of the stock's total available float.
Meanwhile, joining short sellers on the bearish bandwagon are near-term options speculators. The equity's Schaeffer's put/call open interest ratio (SOIR) currently stands at 1.23, as puts outnumber their bullish rivals among options slated to expire within 3 months. What's more, compared to similar readings taken during the past year, ORLY's current SOIR registers in the 66th percentile. In other words, near-term options players have been more skeptically skewed toward the car concern only a third of the time during the past year.
Analysts aren't quite convinced of ORLY's technical muscle, either. The outperformer still harbors 7 lukewarm "hold" ratings, according to Zacks, compared to an equal number of "buy" or better ratings. Plus, Thomson Reuters pegs the stock's average 12-month price target at only $34.50 – a hair's breadth from last week's high.
The bottom line
In conclusion, should the shares of ORLY establish support, potentially surpassing their mid-2007 highs, the lingering skeptics could get spooked. At the stock's average daily trading volume, it would take 6 sessions for the shorts to unload their bearish bets, providing ample fuel for a short-covering boost. Furthermore, an unwinding of skepticism in the options pits, or a fresh wave of upgrades and/or price-target boosts, could also attract buying attention on the Street, potentially vaulting the equity even higher.
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